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The Trillion-Dollar Shadow

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What secrets are hidden in the Federal Reserve's trillion-dollar shadow? Economic recovery depends on confidence, and confidence requires knowledge. But Senators like Chris Dodd and Judd Gregg don't want us to have that knowledge. They don't even want it themselves.

In Sen. Dodd's case, he's trying to give the Fed more authority (over consumer protection) even as he fights to keep its activities hidden. Fortunately, the final decision may not be up to him.

A judge's recent ruling in favor of two news organizations (Bloomberg and Fox) promised to shed light on $2 trillion in concealed Fed emergency loans to major financial firms. That's a start. But Sen. Dodd is still fighting efforts to have a full-scale audit of the Fed's other major bailout activities, including the $1.25 trillion program to buy mortgage-backed securities. That's been going at the rate of $10 billion per week - a massive program which ends this Wednesday.

You could argue that giving $10 billion every week to the people that wrecked our economy is like giving Viagra to sex offenders. (Remember last week's "controversy" about that?) And that $10 billion per week goes to buy the worthless assets of bankers who enriched themselves on loans that ranged from predatory to merely incompetent.

Who's been able to avoid the consequences of their own bad business practices, thanks to the Fed? We don't know yet, because Sen. Dodd promised GOP Senator Gregg there would be no audit of the bailout. Which just goes to show: Scratch a bad policy idea these days and you're likely to find it was promoted under the guise of a false "bipartisanship." Outside the Senate bubble, however, many progressives are aligned with conservatives like Ron Paul on the need for an audit. That makes it one of the few truly bipartisan movements out there.

Why is an audit so important? For one thing, because the Fed is a democratically-created institution, formed by an act of Congress. While it has a certain degree of autonomy, the Fed (the "bank for bankers") is supposed to respond to the will of Congress - although it's had a habit of disregarding orders that don't please it, like the one Congress passed in 1994 to enact meaningful protections against predatory mortgage lending. That got a big yawn under both Democratic and Republican Administrations.

It's not just Congress that needs to know. Shouldn't investors learn which financial institutions made bad decisions and required massive intervention? Doesn't concealing that information only serve to protect blundering CEOs?

That's exactly what Tim Geithner did when he was head of the New York Federal Reserve Bank. In what appears to be a direct violation of his bank's charter, he took junk loans off Lehman's hands and "warehoused" them. That illustrates another reason to shine a light into those dark corners: there may be more charter violations there.

In a piece called Discount-Window Future Darkens After Court Move, the Wall Street Journal's Michael S. Derby writes of the Federal Reserve's fear that "more disclosure would drive away future borrowers, with institutions fearing public knowledge of their emergency loans would be a signal to markets of their weakness."

But isn't that exactly the point? By definition, doesn't any institution that ran itself into a ditch have a certain "weakness"? Sure, some may have been caught in the undertow created by their reckless colleagues. Let them make that case publicly. They'll get a receptive hearing.

The hypocrisy's stunning when it comes to Judd Gregg and the other anti-audit right-wingers. "Free market" acolytes should have some understanding of the god they worship. Of the four requirements traditionally given for a "perfect market," the first is "perfect information." Concealing trillions of dollars in transactions is hardly the way to promote a well-functioning market.

Bernanke is somewhat open to the idea of an audit (although there would no doubt be some haggling over the details). He said this in Congressional testimony: ""... (W)e understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve's management of all facilities created under emergency authorities."

We can't know exactly what's hidden in the Federal Reserve's shadow until we have that audit but, based on the intransigence of certain politicians, here's an educated guess: an audit might well confirm that a lot of institutions really are too big to fail, and need to be broken up now.

Congressional oversight isn't just a privilege of power. It's also a responsibility. When it comes to the "discount window" program, the courts have put an end to the Judd/Gregg obstructionist clique. Now the rest of the Senate must vote to shine a light into the Fed's shadows, as the House has already done.

We need to know the truth. Congress needs to audit the Fed.

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Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:

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Website: Eskow and Associates